Apportionment is the technical
term for deciding how much of a firm's business income is taxed in the
state. For a company with all of its business in Utah and which has no
presence outside the state, the apportionment fraction is 100 percent. A
very large firm with operations all over the country, by contrast, may
have a fraction less than 1 percent.

The rule adopted by Utah
and by many other states uses a three-factor formula to determine a firm's
Utah income. The wage factor is the ratio of state wages to U.S.- wide
(water's edge) wages; similar ratios are calculated for sales to Utah residents
relative to U.S.-wide sales and property values. The apportionment fraction
is then the average of these three ratios. (A firm with no wages company
wide, for example, would only average two factors.)

The larger a firm is,
generally, a smaller percentage of its income is taxed in Utah. That of
course is not surprising, since almost by definition a large company will
be operating in many states and will only have a small portion of its activity
in Utah. By contrast, a company with all of its operation in Utah is bound
to be small.

Table 3.1 reports the
apportionment factor for various sized firms. In this figure and the parent
charts in appendix C, income is measured as U.S.-wide business income for
the company, as defined by Utah law. That is, all adjustments made to
federal taxable income definitions, such as the limited charitable contribution
deduction, the non-allowance of state taxes as a deduction, and the more
generous deduction for business expenses, have been made. However, the
income has not been reduced yet by apportionment to its Utah equivalent. The
apportionment factor is the income- weighted average factor for all companies
in the same class.

The table is for 1999
for non-minimum taxpayers, but basic data is available in appendix C for
1998 as well.

TABLE 3.1

APPORTIONMENT FACTORS

1999 TAXYEAR NON-MINIMUM TAXPAYERS

UNAPPORTIONED INCOME

RETURNS

TOTAL

PROPERTY

WAGE

SALES

AVERAGE

INCOME

TAX

NO INCOME

32

.

.

.

.

.

$ 1 - 25,000

1,978

96.87%

97.21%

97.21%

96.66%

$663

$ 25,001 - 50,000

841

93.38%

93.90%

93.98%

93.11%

$1,693

$ 50,001 - 75,000

525

90.36%

90.56%

91.11%

90.34%

$2,683

$ 75,001 - 100,000

314

85.61%

86.94%

86.51%

85.51%

$3,533

$ 100,001 - 500,000

900

68.03%

70.02%

69.21%

67.87%

$8,520

$ 500,001 - 1,000,000

316

43.40%

45.03%

44.96%

41.69%

$14,646

$1,000,001 - 5,000,000

652

15.65%

16.20%

15.68%

15.19%

$18,793

$5,000,001 -10,000,000

299

7.25%

7.82%

7.71%

6.40%

$25,481

OVER $10,000,000

1,142

0.78%

0.78%

0.82%

0.76%

$452,188

TOTAL

6,999

1.02%

1.02%

1.05%

0.98%

$446,005

As logic predicts, the
share of income that is taxed in Utah declines as the companies get bigger. Companies
in the bottom three brackets (income below $75,000) have over 90 percent
of their economic presence in Utah. By contrast, companies with income
over $10 million have less than 1 percent of their activity here. For
all companies not paying the minimum tax, the weighted average apportionment
factor is only 1.02 percent, compared to 1.5 percent in 1993. Overall wages
are the largest factor and sales are the smallest.

As well as being factually
interesting, the above data indicate an interesting policy conclusion. For
companies that pay the most taxes and are the largest nationwide, the state
can do very little to improve or worsen the fiscal situation of the firm. For
example, for a large firm that suffers a loss, the provision of a Utah
loss carryback and the refund of previous taxes will not have much impact
on the firm's health. Similarly, for large firms, the size of the Utah
charitable deduction is likely to be inconsequential for determining the
firm's contributions.

Are there industry differences?

Since so many of our companies
do a small portion of their business in Utah, we should not expect any
sector to be Utah dominated. For all sectors, the average factor is the
same 1.02 percent as above.

Nonetheless, there are
important differences in the apportionment factor, by major industry. As
Table 3.2 shows, Construction and Manufacturing are more likely to have
a higher share of their activity here, while Mining and Wholesale trade
are smaller here. This is not surprising, given the small and local scale
of many construction companies. By contrast, the Mining and Wholesale Trade
sectors are more dominated by large national or international firms. The
author was a bit surprised at the relatively large factor for Manufacturing.
At this point, we think it is good to remind the reader that we are only
considering firms that are incorporated as C corporations, and not the
many small local operations that are sole proprietors or partnerships,
or even S corporations.

TABLE 3.2

APPORTIONMENT FACTORS

1999 TAXYEAR NON-MINIMUM TAXPAYERS

SECTOR

RETURNS

TOTAL

PROPERTY

WAGE

SALES

AVERAGE

TAX

NOT CODED, OTHER, OR NON-DISCLOSABLE

1,784

0.60%

0.62%

0.50%

0.64%

$31,194

AGRICULTURE, FORESTRY, AND FISHING

143

1.80%

1.43%

2.90%

1.07%

$557,350

MINING

52

0.28%

0.42%

0.15%

0.26%

$116,942

CONSTRUCTION

639

2.93%

2.83%

2.86%

3.11%

$175,731

MANUFACTURING

538

2.30%

2.75%

2.70%

1.46%

$481,806

TRANS., COMM., UTILITIES

211

1.38%

1.31%

1.53%

1.31%

$1,073,825

WHOLESALE TRADE

1,064

0.44%

0.36%

0.38%

0.58%

$384,397

RETAIL TRADE

768

1.40%

1.42%

1.42%

1.36%

$951,120

FINANCE, INSURANCE, AND REAL ESTATE

549

1.69%

1.68%

1.82%

1.57%

$577,906

SERVICES

1,251

1.35%

1.30%

1.45%

1.31%

$265,427

TOTAL

6,999

1.02%

1.02%

1.05%

0.98%

$446,005

An alternative apportionment
scheme

Not all states use the three factors as explained
above, some weight sales more heavily, several even use sales only. The
reason behind these schemes is to give more favorable treatment to firms
that produce in the state or that have more of a presence than selling output. We
do not want to imply that Utah should do that in this section, we are neutral
to that proposal. Although the major purpose of such a change is not meant
to aid a particular size category or industry, it is interesting to examine
the impact in those contexts. We will address these questions only as an
example of how this data may be used.

If the sales factor were less than the overall
factor, then giving more weight to that factor would decrease total collections.
Conversely, if sales were greater than the total factor, then giving it more
weight would increase collections. Both the tables show that the sales factor
is smaller than the weighted average, thus giving that factor more weight
would reduce revenue.

The sales factor is less for all sizes of firms
in table 3.1, so all sizes would benefit as a group, but the larger benefit
would be to the larger firms and the largest benefit is to firms in the $5
million to $10 million range. We should make clear that any statement about
benefits to a size group applies to a group on the average and not to all
members of the category.

Addressing the same question by sector, the sectors
where the sales factor is largest relative to the total factor are Wholesale
Trade, Construction, and Not Coded, table 3.2. So giving higher weight to
sales would mean higher taxes for these sectors. All other sectors would
face lower taxes, with the largest reductions being in Agriculture and Manufacturing.
Retail Trade comes the closest to being neutral, with a 1.36% sales factor
and a 1.4% total factor. This is probably since the traditional retail business
requires making sales generally using local workers and locations. This may
change with the growth of Internet transactions.